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2015 (10) TMI 393 - ITAT BANGALORE

2015 (10) TMI 393 - ITAT BANGALORE - TMI - Disallowance of expenses incurred in earning tax-free income invoking provisions of section 14A - Held that:- For the purpose of deciding the disallowance under section 14A r.w. Rule 8D(2)(ii), those details will be very material. We are of the view that if the stand taken by the assessee on the disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is factually correct, then no disallowance of interest expenses can be made. We, however, fi .....

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Rule 8D(2)(iii) is concerned, the assessee has not shown as to what is the expenditure to be disallowed. The assessee’s only plea before the CIT(A) was that weighted average based on time (no. of days) in which investments were made should be considered. As rightly contended by the ld. DR, the above stand of the assessee cannot be sustained in view of the clear mandate of Rule 8D(2)(iii) of the Rules, which refers to only the average value of investments as appearing in the Balance Sheet of the .....

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to restrict the disallowance to income that is exempt in the set aside proceedings under Rule 8D(2)(iii) of the Rules, after complying with the directions with regard to disallowance of interest expenses under Rule 8D(2)(ii) of the Rules. - Decided partly in favour of assessee for statistical purposes. - ITA No.1099/Bang/2012 - Dated:- 4-9-2015 - SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER For The Appellant Shri Mukesh Kumar Jain, CA For The Respondent Dr. P .....

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D(2) of the Income-tax Rules [ the Rules ] can be sustained. 3. The factual background of the case is as follows. The assessee is a company engaged in the business of manufacture of vaccum systems, pumps, watch crystals, filters and optical counting. It is not in dispute that during the previous year, the assessee earned divided income of ₹ 9,728 which was exempt u/s. 10(35) of the Act. In view of the provisions of section 14A of the Act which provides that any expenses incurred in earning .....

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e Act r.w. Rule 8D(2)(ii) & (iii) of the Rules, the AO disallowed a sum of ₹ 46,62,647 as follows:- The expenses related to exempt income in this case are disallowed as discussed further. (a) As per Rule 8D 2 (i) The assessee company has not incurred any direct expenditure to earn the dividend income. (b) As per Rule 8D 2 (ii): The assessee company has debited an interest expenditure of ₹ 2,33,64,542 in its books. (A) Average value of investment = 12,03,34,866 (B) Average of Asse .....

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ore CIT(A): i) The Interest debited to profit & loss account of ₹ 2,33,64,542/- which was considered by the assessing officer for disallowance under Rule 8D of the Rules is the interest incurred by the assessee on account of credit facilities and other lease obligations. ii) Term loan period loan granted by banks are with prior conditions and are disbursed by banks to the vendor directly. So question of investing such amount in investment which are likely to yield tax free income, does .....

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e interest bearing borrowed funds. v) The Assessee also gave an extract of the own funds [as at 31st March 2008] of the Assessee for the year under consideration. Share capital - 2,58,36,420 Reserves & surplus - 1,1,71,75,150 Total - 1,4,30,11,570 vi) The Assessee further pointed out that M/s Aureos India Trustees Private Limited had invested ₹ 30,00,00,000 by way of compulsorily convertible debentures in the company in the financial year 2006-07 [AY 2007-08] which the Assessee investe .....

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s on which interest expenditure was incurred was not used for making investments which are likely to yield tax free dividend income, necessitating invoking Sec.14A of the Act: Financial year Borrowings from banks Compulsorily Convertible Debentures Investment in mutual funds Investment in building Investment in machinery Investment in subsidiary 31/3/2006 118,234,771 - 31/3/2007 145,515,128 300,000,000 130,240,687 - 62,270,612 - 31/3/2008 328,751,010 300,000,000 110,105,846 - 195,440,732 - 31/3/ .....

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not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. The Assessee submitted that in the present case, the assessing officer has applied the simple average of the value of the Investment. Application of the simple average in some cases may give absurd results. For example, if the investment at the beginning date is 10 Crores and the said investment are redeemed on completion of one month the ave .....

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erage based on time and by doing so the disallowance would work out to ₹ 90,49,796/-. The Assessee thus pleaded that application of Rule 8D(2)clause (ii) & (iii) as done by the AO was erroneous. 5. The CIT(Appeals), however, did not agree with the submissions of the assessee. He was of the view that assessee failed to establish nexus between the borrowed funds on which interest was paid and its use for the business of the assessee. He also observed that if assessee kept both borrowed f .....

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d concluded that disallowance under Rule 8D is mandatory on and from AY 2008-09 from which Assessment Year Rule 8D was applicable. The CIT(A) also held that once there is tax-free dividend, then disallowance u/s. 14A has to be made of expenses incurred in earning tax-free income irrespective of the quantum of the expenditure that has to be disallowed. 6. Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. 7. The submissions made by the ld. c .....

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of Joint Investments Pvt. Ltd. v. CIT, ITA No.117/2015 dated 25.2.2015, wherein the Hon ble High Court expressed the view that disallowance u/s. 14A of the Act cannot, in any case, exceed the dividend income. Following were the observations that were brought to our notice:- 9. In the present case, the AO has not firstly disclosed why the appellant/assessee s claim for attributing ₹ 2,97,440/- as a disallowance under Section 14A had to be rejected. Taikisha says that the jurisdiction to pr .....

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out to nearly 110% of that sum, i.e., ₹ 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case. 8. Re .....

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on to the rival submissions. In the course of hearing, a query was raised by the Bench as to whether the Balance Sheet as on 31.3.2007 and 31.3.2008 were filed to show that borrowed funds were not used for the purpose of investments which yielded tax-free income. The ld. counsel for the assessee has not filed the required details before the Tribunal. In our view, for the purpose of deciding the disallowance under section 14A r.w. Rule 8D(2)(ii), those details will be very material. We are of the .....

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